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Eurozone economy on recovery path

While the recent uncertainty in relation to Greece has generated much negative newsflows for the eurozone, the underlying macro data indicate that the eurozone economy is on an improving trajectory, writes John Fahy.

The economy maintained its improved pace of growth in the first quarter of this year, growing by 0.4% for a second consecutive quarter. In year-on-year terms, growth edged up slightly to 1% from 0.9%.

The expenditure breakdown of GDP showed some broad-based improvement, with both consumer spending and investment making positive contributions to growth. Meanwhile, net trade did act as a slight drag, although this was in part due to weak growth in some of the region’s key trading partners.

The first quarter GDP data also showed that growth was less reliant on the performance of Germany, the currency bloc’s largest economy. While German growth slowed from 0.7% to 0.3%, this was offset by improved growth in France (0.6% from 0%), Italy (0.3% from 0%) and Spain (0.9% from 0.7%).
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Meanwhile, in terms of more recent data, leading indicators of activity suggest that the economy managed to maintain its momentum in the second quarter. The composite PMI averaged 53.9 in the quarter, above its first quarter average of 53.3. The encouraging signs from the survey data are also evident in the “hard” data for the second quarter. Retail sales data for April/May show that growth remained solid, picking up by 0.6% compared to the first three months of the year, when sales grew by 0.7%.

Meanwhile, on the producer side, manufacturing output – which excludes the volatile energy sector – has picked up, growing by 0.4% in April/May compared to quarter one.The modest growth in economic activity, in recent quarters, has also helped to bring about some improvement, albeit modest, in the labour market.

The eurozone unemployment rate has edged lower, standing at 11.1% in May,a more than three-year low. However, this still represents a high level, both in historic terms and when compared to other advanced economies.

Another important point to note, when assessing the eurozone labour market, is the large dichotomy in performance across member states. For example, the unemployment rate in Germany is at just 4.7%. This compares to 10.3% in France and 22.5% in Spain.

Inflation, at just 0.2% in June, remains very subdued in the region. The rate fell as low as -0.6% in January. This very weak inflationary environment prompted the ECB into launching a full-blown QE programme back at the start of the year.

Last week’s meeting of the ECB’s Governing Council acknowledged the improved macroeconomic backdrop for the eurozone economy. The meeting statement noted that there was a “broadening” in the economic recovery. The ECB expects this recovery to broaden further. At the same time, it is committed to the “full implementation” of its QE programme and is willing to provide further stimulus, if necessary, to achieve its price stability objective.

In terms of the outlook, the eurozone recovery still faces some significant headwinds. These include the continuation of tight fiscal policy, high levels of unemployment in many countries and a lack of structural reforms in some economies, which continue to act as restraints on the pace of activity.

However, there are also some tailwinds for the economy including the favourable impact from lower oil prices, a weaker euro and the impact of recent monetary policy easing measures, with interest rates likely to remain at very low levels for the next few years.

These factors are reflected in the fact that the ECB expects relatively modest growth of 1.5% this year and growth of around 2% in 2016 and 2017. While this would represent a further acceleration in the economy’s growth path, it would still lag behind both the US and UK, where their economies are expected to grow by some 2.55-3% over the same period.